THE LAST CHAPTER

Chapter 35 is about the short run trade-off between inflation and unemployment. The Phillips curve is the short-run relationship between inflation and unemployment. This idea was first published in 1958 by A.W Phillips in an articled titled "The relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom". He showed a negative correlation between  the rate of unemployment and the rate of inflation: years with low unemployment tend to have high inflation and years with high unemployment tend to have low inflation. The natural rate of unemployment depends on various features of the labor market (minimum wage laws, market power of unions, etc). The inflation rate depends primarily on growth in the quantity of money controlled by the Fed. Paul Samuelson and Robert Solow reasoned that this correlation arises because low unemployment was associated with high aggregate demand which in turn puts upward pressure on wages and prices throughout the economy. The Phillips curve simply shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate-demand curve move the economy along the short-run aggregate-supply curve. An increase in the aggregate demand for goods and services leads, in the short run, to a larger output of goods and services and a higher price level. Larger output means greater employment and thus a lower rate of unemployment. Shifts in aggregate demand push inflation and unemployment in opposite directions. If policymakers expand aggregate demand they can lower unemployment but only at the cost of higher inflation. Contracting aggregate demand they can lower inflation but at the cost of temporarily higher unemployment. In the 1960's, however, it was concluded that inflation and unemployment are unrelated in the long run. . The long-run Phillips curve is vertical at the natural rate of unemployment. Monetary policy could be effective in the short run but not in the long run.

Chp. 34

Chapter 34 covers how a government's monetary (supply of money set by the central bank) and fiscal (the levels of governments spending and taxation set by the president and Congress) policies affect aggregate demand. The aggregate demand curve shows the total quantity of goods and services demanded in the economy for any price level. For the U.S economy the most important reason for the downward slope of the aggregate demand curve is the interest rate effect. The theory of liquidity preference is Keyne's theory that the interest rate adjusts to bring money supply and money demand into balance.    The nominal interest rate is the interest rate usually reported, and the real interest rate is the interest rate corrected for the effects of inflation. The first piece of the theory of liquidity preference is the supply of money, which is controlled by the federal reserve. The fed can alter the money supply through open-market operations, changing reserve requirements (amount of reserves banks must hold against deposits) or the discount rate (interest rate at which banks can borrow reserves from the fed). In this chapter the money supply will be fixed, therefore a vertical curve. The second piece of the theory of liquidity preference is the demand for money. The liquidity of money explains the demand for it: people choose to hold money instead of other assets that offer higher rates of return because money can be used to buy goods and services. If the interest rate is above the equilibrium level the quantity of money people want to hold is less than the quantity the fed has created.

Chp 33

Chapter 33 introduces aggregate demand and aggregate supply and shows how shifts in these curves can cause recessions. A period when output and incomes fall, unemployment rises, is known as a recession when it is mild and a depression when it is severe. Three key facts about economic fluctuations is that economic fluctuations are irregular and unpredictable, most macroeconomic quantities fluctuate together, and as output falls unemployment rises (because when firms produce fewer goods and services they lay off workers). Classical theory is based on the dichotomy and money neutrality. Classical dichotomy is the separation of economic variables into real and nominal while money neutrality is the property that changes in the money supply only affect nominal variables not real variables. These assumptions are an accurate description of the economy in the long run but not the short run.Therefore in the short run, changes in nominal variables such as money and prices are likely to have an impact on real variables. Short run nominal and real variables are not independent. As a results, in the short run, changes in money can temporarily move real GDP away from its long-run trend. The model of aggregate supply and aggregate demand can be used to explain economic fluctuations. This model is graphed with the price level, measured by the CPI/GDP deflator on the vertical axis and real GDP on the horizontal axis. Aggregate demand curve shows the quantity of goods and services households, firms, the government and customers abroad wish to buy at each price level. The aggregate supply curve shows the quantity of goods and services that firms produce and sell at each price level. Price level and output adjust to balance aggregate supply and aggregate demand. GDP=C+I+G+NX. A decrease in the price level increases consumption, investment, and net exports.

ARticle 8

The first thing that caught my attention was the way monetary policy was described as "creature of each nations domestic politics" and that the Narrative of Central Bank Omnipotence is in turn devolving into a Narrative of central Bank competition. This structural change in the 21st century is happening because of massive global debt. Instead of international economic cooperation everyone is competing and things just don't look too good. As discussed early in Micro, trade and cooperation is pretty good. Like in the prisoners dilemma. If we could only all trust each other everyone would be better off. But as humans we are incapable of it and put our self-interest ahead. Global trade volumes everywhere peaked in Quarter 4 and quarter 3 in 2014 and have declined since. I can tell that isn't exactly a good thing but I can't tell to what degree, just like the article predicts. But apparently the small percentage of decline in exports is kinda rare. With these small percentage declines its "next to impossible for a real economy to expand when exports are contracting" in the way they are today. I like how the dude says "real economy". It's funny how calling things "real" in economics is taken so seriously. Person A: blah blah blah percentage decline blah blah. Person B: Yes but is it a real percentage?? According to the this dude the U.S is already experiencing a recession. Luckily he gets right too it, unlike Stockman who just can't stop playing around and can no longer be taken seriously because of his weird choice of words. Anyway, yes, recession. A "mild" recession. An "earnings recession" because "the decline in export values has only started to show up as a decline in export volumes" which is "pretty much all macroeconomic evils". I like this guy, straightforward, doesn't mess around, cool dude cool dude. 

chp 32

Chapter 32 is a continuation of chapter 31 and goes over a macroeconomic theory of the open economy. To understand the forces at work in an open economy the supply and demand of two markets have to be focused on, the supply and demand in the market for loanable funds  (which coordinates the economy's saving, investment, and the flow of loanable funds abroad (a.k.a net capital outflow)) and the supply and demand for foreign-currency exchange (which coordinates people who want to exchange the domestic currency for the currency of other countries). Whenever a nation saves a dollar of its income, it can use that dollar to finance the purchase of domestic capital or to finance the purchase of an asset abroad. The supply of loanable funds come from national saving (S), and the demand for loanable funds comes from domestic investment (I) and net capital outflow (NCO). Loanable funds should be interpreted as the domestically generated flow of resources available for capital accumulation. The purchase of capital assets adds to the demand for loanable funds, regardless of whether that asset is located at home (I) or abroad (NCO). When NCO> 0 the country is experiencing a net outflow of capital; the net purchase of capital overseas adds to the demand for domestically generated loanable funds.

Chp 31

Chapter 31 is the beginning of macro-economics in open economies. A closed economy is an economy that does not interact with other economies in the world whereas an open economy does. An open economy interacts with other economies in two ways: it buys and sells goods and services in world product markets, and it buys and sells capital assets such as stocks and bonds in world financial markets. Exports are domestically produced goods and services that are sold abroad, and imports are foreign produced goods and services that are sold domestically. The net exports of any country are the difference between the value of a country's exports - the value of a country's imports. Net exports are also called trade balance since net exports can sell us whether a country is a buyer or seller in the world markets. If net exports are positive the country suns a trade surplus If negative then it is a trade deficit. If zero than the country has a balanced trade. Factors that influence a country's net exports are 1.) the tastes of consumers for domestic and foreign goods 2.) the prices of goods at home and abroad 3.) the exchange rates at which people can use domestic currency to buy foreign currency 4.) the income of consumers at home and abroad 4.) the cost of transporting goods from country to country and 5.) government policies toward international trade. Net capital outflow refers to the difference between purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners.

Article #7

In this article David Stockman totally destroys Janet Yellen and her thoughts on the possibility of negative interest rates. He refers to her as a "delusional Simpleton" and a person who says "the same stupid thing over and over again. One interesting thing in the beginning was that the US economy cannot be supported, or more so rescued by central bank policy intervention (according to Stockman). I've said this once but I'll say it again. Stockman, you sir, are a ray of sunshine. Apparently there a two ways that the Fed can our economy today. It can inject central bank credit to raise prices and lower yields. Or it can falsify money market interest rates and the yield curve which will push households and businesses to borrow and spend more. I don't think I know enough or fully understand to make an opinion of either of the options. I want to comment on the whole getting houses and business borrowing and spending more than they have to. Wouldn't that just lead to some more problems. I know borrowing and spending is very good for the economy. Putting money into a bank increases the money supply since interest is applied to it. Spending makes the economy grow as well. But what about spending more than you can actually spend. I believe Mr. Waller once said that its alright and actually healthy for the economy to go through some recessions. It builds immunity since you learn what not to do in the future. So I guess this isn't too bad. Then again I'm just typing this off the top of my head. Sorry if I don't make sense...I tried.